Philip Gibbs, manager of Jupiter's Absolute Return, Financial Opportunities and Global Financials funds, comments on Obama’s proposals for banking reform.
While bank reforms have been on the cards for some time, the timing of President Obama's proposals appears politically motivated. In short, Obama aims to limit the size of US banks and stop retail banks operating proprietary trading (when a bank trades with its own money for profit) and private equity activities. However, the exact timing and shape of his proposals and their potential impact is still uncertain.
There is little doubt that reform is required after the credit crisis of 2007-08. However, bank earnings are just starting to recover. Proprietary trading and private equity activities are potentially lucrative for these businesses and can be used to subsidise fees (i.e. make them lower to attract business) and increase lending activity. These proposals therefore threaten the rate at which banks recover and their lending growth.
History tells us that tightening bank regulation aggressively while economies are recovering from recession presents a real risk that growth will be stifled. This is particularly true now with Western economies still going through the process of reducing their debts.
There will be areas of the global banking system that will be unaffected by Obama's proposals - emerging markets, for example. European (ex UK) investment bank earnings from proprietary trading and private equity are relatively small, so if these proposals were adopted there, the impact on earnings would be short-term. The US investment banking system, therefore, could become less competitive globally. Adaptation will be important for these institutions.
Fortunately, my portfolios have been cautiously positioned since the beginning of the year due to my concern about Western government debt levels and the prospect of quantitative easing running out. Cash levels are relatively high in my financials funds and the gross exposure of the Jupiter Absolute Return fund is very low. In the financials funds, we have recently added exposure to some attractive growth opportunities in Asia (we added Bank of China, for example).
Elsewhere in the portfolio, we maintain exposure to well-capitalised Western banks and insurance companies which remain attractively valued and to Asian property companies which are benefiting from the favourable monetary environment in the US.
This article first appeared on the Hargreaves Lansdown website. Please note Hargreaves Lansdown and Jupiter do not necessarily share his views.
